Many smaller banks in the United States recently received a bit of surprising news. The banking agencies published their notices of proposed rulemaking relating to the bank capital requirements. The Basel III NPR made clear that only the smallest banks in the United States would be exempt from compliance with the heightened regulatory capital requirements of Basel III. Over time, smaller banks will need to raise capital in order to meet the new requirements that will be phased in over the next few years. Historically, smaller banks have found it difficult and expensive to raise capital. Many smaller banks were not able to raise capital on their own, and turned to issuances of trust preferred securities, which then got pooled with trust preferred securities issued by other small banks, and sold (on a packaged basis) to investors. Trust preferred securities will no longer be eligible for favorable regulatory capital treatment. Smaller banks must offer common stock, or non-cumulative perpetual preferred stock, or REIT preferred stock. Memories are probably too fresh to accept a new pool instrument, even if it were a simpler pooled non-cumulative preferred. A few JOBS Act changes may provide some new alternatives for smaller banks. First, small banks might want to consider issuing securities at the bank level and rely on the exemption from registration offered by Section 3(a)(2). A national bank generally relies on Part 16 of the Office of the Comptroller of the Currency’s (the “OCC”) regulations in connection with offerings pursuant to Section 3(a)(2). The Part 16 regulations generally require that a national bank offer and sell its securities pursuant to a registration statement filed with the OCC, unless there is an available exemption. An exemption from the registration requirement is available if the national bank offers and sells its securities in transactions that comply with the Regulation D safe harbor or in Rule 144A qualifying transactions. Generally, banks have structured their offerings of securities to comply with the Regulation D safe harbor in order to avoid the OCC registration statement requirement. Once the SEC promulgates rules to permit general solicitation and general advertising in connection with Rule 506 offerings and resales under Rule 144A, banks should have an easier time raising capital. Banks will be able to offer securities at the bank level in 3(a)(2) offerings, using general solicitation, provided that actual investors are verified to be accredited investors. If the institution were to issue securities at the bank holding company level instead (for which the 3(a)(2) exemption is not available), this new flexibility in relation to private offerings is still quite useful.
Prior to enactment of the JOBS Act, Section 12(g) of the Exchange Act required issuers to register a class of equity securities with the SEC if, on the last day of the issuer’s fiscal year, such class of securities was held of record by 500 or more record holders and the company had total assets of more than $10 million. After a company registers under Section 12(g), all of the reporting requirements under the Exchange Act apply; therefore, a company would need to file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and proxy statements on Schedule 14A, and certain persons would be required to report transactions on Forms 3, 4, and 5 and Schedules 13D and 13G. Historically, a company could deregister a class of equity securities under Section 12(g) when such class of equity securities was held of record by fewer than 300 persons, or by fewer than 500 persons and the total assets of the issuer had not exceeded $10 million on the last day of each of the issuer’s three most recent fiscal years. Title VI of the JOBS Act, “Capital Expansion,” amends Section 12(g)(1)(B) of the Exchange Act, and requires that a bank holding company register under the Exchange Act not later than 120 days after the last day of its first fiscal year ended on which its total assets exceed $10 million and on which it has a class of equity security (other than an exempted security) held of record by 2,000 or more persons. Title VI the JOBS Act also permits banks and bank-holding companies to suspend registration under Section 12(g) if the number of holders of record falls below 1,200 persons. Banks are already taking advantage of this new flexibility and filing to deregister, which will result, over time, in significant cost savings for these institutions. Of course, many of these same institutions may be facing higher compliance and legal costs as they attempt to address the requirements of the Dodd-Frank Act. If Ben Franklin were alive today, he might want to footnote his aphorism about a penny saved being a penny earned. He just wasn’t focused on compliance costs.